CPA Advice, Flipping in Maryland

I am seeking some advice relevant to when to bring a CPA onto my team. I have provided an outline of my current situation along with the direction my partner (@kanwar sodhi) and I intend to go below.

We are currently working on a deal where, we will be using a hard money lender to purchase a property in the Baltimore City/County area to flip. Ideal numbers for us are, a purchase price around 100k, renovation around 50k, and an ARV 200k+, just so you know the amount of capital we are talking about here. We are also in the process of forming an LLC and hope to purchase a property in the next month or sooner.

While I don't understand the exact tax implications I know they will not be overly complicated, as we will likely only complete one flip this year. That being said, the tax implications will certainly be greater than what we have dealt with in the past. Figuring out how to file our taxes at the end of the year isn't our real concern though. I am confident we can figure that our ourselves, or hire a CPA during tax season. My concern is that my partner and I aren't taking the appropriate actions now to make sure we lessen our tax burden during filing time. I would also like to accurately forecast what our tax responsibilities will be, to a reasonable degree of accuracy. From the little I understand about taxes, it appears the biggest impact to our tax responsibilities will stem from how we set up our LLC. The common example I see is, people set up their LLC so that it is taxed as an S-corp, which I don't fully understand, but it seems to be beneficial?

To conclude, given the our small portfolio is it necessary/beneficial to talk to a CPA at this point? Ultimately we intend to increase the number of flips we do a year to 2-4, and start to acquire buy and hold properties. At some point a CPA will be needed, the question is when?

There is a potential for payroll tax savings with the creation of an S-corp.

Whether you create an entity taxed as a partnership or an S-corp; you will be required to file an entity tax return. Federal Partnership/S-corp tax return and the relevant state tax return. Preparation of these forms in itself might be difficult which would require the use of a CPA.

In addition to the preparation of the forms - the CPA can provide you strategies to reduce your overall tax burden.

Do you want to do your own tax work? In my opinion you should already have one because CPAs bring experience and ideas and strategies that help you accomplish your goals. Your foundational setup is important. What’s the dilemma?

The other no Brainer is if you make a mistake it could be fraud. If your accountant makes a mistake it’s a typo. Cheap insurance

Profit from flipping is ordinary income. However you will have to file estimated returns, (or pay a modest penalty) Most importantly you will have to pay 14.5% in self employment taxes (basically Social Security)

Traditionally an "S" Corp or an LLC taxed as and S Corp can reduce the amount of SS tax. However with the new tax law a lot has changed. Especially this year I do not think doing it yourself is a good idea for taxes. Find a GOOD CPA that understands real estate and the new tax law changes.

i recommend Jeff Stoller from Goodwich Stoller and Associates. in Catonsville MD. @Brandon Hall who posts here also

If you're planning to do this one deal only - there is no tax strategy to worry about at this point. Strategies, including those mentioned above, can be helpful when you're making substantial profit. You're, however, looking at losing money this year.

Why? A $50k rehab will take you 3-6 months. Hard money for this length of time will cost you at least $10k, probably more. Closing costs on both ends will cost you another $15k-$20k. Then you have carrying costs: property taxes and insurance. A few other things you did not take into consideration. Assuming your ARV and repairs were estimated accurately (and they almost never are) - you're looking at break-even on this deal. At best. That's before business overhead expense: driving, education, professionals etc.

I think you should bring an accountant onboard ASAP, but not for tax advice. For business advice - such as walk away from this deal and buy much deeper. FYI: 95% of beginner flippers lose money.

@Basit Siddiqi , thanks for the information relative to being taxed as an S-corp or Partnership. Relative to your statement that a CPA can provide strategy advice to reduce our overall tax burden, I agree.

To clarify on my original post, I was wondering if consulting with a CPA now would be beneficial in terms of tax burden reduction versus what the CPA bills me, given the limited size of our portfolio. Assuming that if I consult with one now or not, I will use a CPA when filling my taxes.

@Carl Fischer thanks for responding to my post. To answer your question, no I do not want to do my own tax work. Regardless of what I do now, I will hire a CPA to file my taxes. I was looking for guidance on whether I should consult with one now to develop a tax strategy, or if given how small our portfolio is, the cost wouldn't outweigh the savings come tax season. From your reply, it seems you think it would be worth the consultation fees?

@Ned Carey , thanks for the reply and recommendation of a good CPA! I was probably not clear enough in my original post, I do not intend to do my own taxes come tax season, we will hire a CPA. I was just wondering if consulting with one now was worth the time and money.

@Michael Plaks , I should clarify, those numbers are not from any deal we are considering, I was throwing out the ideal numbers in a deal we would like to see. It seems that you don't think our ideal numbers are something to strive for, I appreciate the feedback. Your assumptions about rehab length, closing cost, and hard money cost are in line with what we assumed. I will note that in the deal I outlined above, the hard money and holding cost for us would be 16K ish, given our current lender. Also that most of the deals we are actually looking at have an ARV closer to 220k, I was just being general in my original post. If you still think are deal parameters aren't setting us up for a potential profit, I'd love to hear your thoughts.

@Patrick Horgan I know a great CPA in Baltimore. I don't know if she's taking on new clients this time of year, but I would be happy to share with you her contact, if you are interested, you can PM me.

@Michael Plaks, I should clarify, those numbers are not from any deal we are considering, I was throwing out the ideal numbers in a deal we would like to see. It seems that you don't think our ideal numbers are something to strive for, I appreciate the feedback. Your assumptions about rehab length, closing cost, and hard money cost are in line with what we assumed. I will note that in the deal I outlined above, the hard money and holding cost for us would be 16K ish, given our current lender. Also that most of the deals we are actually looking at have an ARV closer to 220k, I was just being general in my original post. If you still think are deal parameters aren't setting us up for a potential profit, I'd love to hear your thoughts.

With $220k, it sounds better. Still, the biggest problem is the fact that both ARV and repairs usually end up worse than expected when you start.

Then you have timing issue. Each additional month costs you $1,500 - $2,000 - until you run into HM expiration and must pay $2k-$4k to extend it. Etc.

Now, assume you do manage to make money on this one. I'll be generous and give you $40k net profit (even though I don't believe it will happen, frankly). So, each of you made $20k income after working for half-year on this project, almost full-time. Hmmm. Do you see why I don't like your numbers, even the $220k?

I do not intend to do my own taxes come tax season, we will hire a CPA. I was just wondering if consulting with one now was worth the time and money.

When the times comes to file your taxes it is too late to make the structural changes that can save money. You should meet with a CPA ahead of time to set up things most effectively. However right now many accountants will be too busy until April 15 to do much consulting.

@Michael Plaks , ok so let me see if I can summarize what your saying here. We need to properly account for all cost, closing cost on both ends, realtor fees on the sale, points up front from the HM lender, holding cost (interest payments on the loan), potential loan extension cost (1 point in our case). Then we need to thoroughly vet our ARV and rehab values, and even then add a contingency on them (say 10% on both). Account for self employment taxes, approximately 15%, and then we can get a somewhat reasonable estimate on our potential profit or loss. Finally, assume because we are beginners we will mess up in someway or miss an opportunity somewhere, and we should pad are numbers even further, say $10,000?

In response to your last comment, that in a best case we make 20k for a half a year of full time work. We will hire contractors for almost all of the work if not all, so is this really full time (40 hours a week)? I understand we will still need to put in time to talk to supervise the contractor, visit the site frequently, sell the house, any paperwork we need to do, inspection submittals to our HM lender, etc, but should we expect this to take 40 hours a week each? Even it does, 40 hrs/wk x 26 wks = 1,040 hrs $20,000/1,040hrs = $19.23/hr. Not getting rich that way, but better than minimum wage, and this would be on top of our current salaries. Now, if we can manage to spend only 20 hours a week each managing the renovation, we jump to $38.46/hr. If we make $20/hr and gain an incredible amount of experience and knowledge in the process, that is worth it to me. We don't plan on getting rich on this deal, or even flipping houses long term, we want to build capital to purchase buy and holds. I do value your advice and information.

We can debate the details, but overall you heard me correctly. There's a lot of costs to take into consideration, and then you should pad it for the inevitable snafus and estimated numbers that are two optimistic. Right now, you have little to no room for errors.

One tax comment, even though taxes are a separate conversation from profits: you will pay 15% SE tax PLUS regular Federal income tax PLUS Virginia state income tax. Could be 40% total tax.

I also have a major issue with you willing to settle for $20/hr. This may be acceptable for a W2 job with minimal risk and stress. For an entrepreneur, it's a no-starter. If you're not shooting for at least $100/hr - you're not looking at it as a business yet.

@Michael Plaks I'm in no position to dismiss any experienced REI professional's advice, so thanks for providing your input.

Taxes are something we have been thinking about. We need to met with someone to nail down the exact numbers, perhaps this is a reason enough to consult with a CPA now versus later. I am estimating at least 30% of our profits to go to taxes.

I understand the $100/hr philosophy, however it is something that I find a little difficult to aim for without experience in flipping. Without knowing how many hours my partner and I will have to put into a flip, calculating an hourly rate is difficult. Therefore we are setting a desired profit and timeline as our goals, of course doing our best to accurately consider all cost and take into account Murphy. Once completed we could back calculate our hourly rate and consider how to improve it if necessary moving forward.

Profit from flipping is ordinary income. However you will have to file estimated returns, (or pay a modest penalty) Most importantly you will have to pay 14.5% in self employment taxes (basically Social Security)

Traditionally an "S" Corp or an LLC taxed as and S Corp can reduce the amount of SS tax. However with the new tax law a lot has changed. Especially this year I do not think doing it yourself is a good idea for taxes. Find a GOOD CPA that understands real estate and the new tax law changes.

i recommend Jeff Stoller from Goodwich Stoller and Associates. in Catonsville MD. @Brandon Hall who posts here also

I 100% "Co-Sign" on Jeff Stoller from Goodwhich Stoller. He was originally recommended by @Ned Carey when I first joined this site. I used him this year and absolutely crushed it, Thanks Ned!